Case title:
Purnendu Shekhar Sinha v. The Union of India & Ors.
Date of Order:
26-02-2024
Bench:
Hon’ble Mr. Chief Justice Vinod Chandran
Hon’ble Mr. Justice Rajiv Roy
Parties:
Petitioner(s): 1. Purnendu Shekhar Sinha
Respondent(s): 1. The Union of India through the Secretary, Department of Economic Affairs, Ministry of Finance, Government of India, North Block, New Delhi.
2. The Secretary, Department of Revenue, Ministry of Finance, Government of India, North Block, New Delhi
3. The Chairman, Central Board of Direct Taxes, North Block, New Delhi (under Ministry of Finance, Government of India).
4. The Chief General Manager, State Bank of India, Local Head Office, West Gandhi Maidan, Patna.
SUBJECT:
The instant case dealt with by the Hon’ble High Court of Patna (hereinafter referred to as ‘the High Court’ or ‘the Court’) involving a Writ Petition wherein the petitioner, a retired employee of SBI, sought parity in taxation between government employees and employees of other establishments under Article 14 of the Indian Constitution. He contested the tax deductions on his leave encashment stating that the discrimination was unconstitutional. The petition was dismissed on the grounds that the disparity had been upheld through several rounds of judicial scrutiny.
IMPORTANT PROVISIONS:
The Constitution of India, 1950:
Article 14
Article 12
Article 226
Article 311
The Income Tax Act, 1961 (the Act):
Section 10(10AA)
The Central Civil Services (Leave) Rules, 1972 (the Rules)
OVERVIEW:
- The petitioner’s employment at the State Bank of India (SBI) began in 1981. He retired on 31.08.2021.
- Prior to retirement, he had filed a petition asserting his entitlement to a sum of Rs. 6.7 Lakhs as leave encashment. He noted that after paying his taxes, the amount will come down to Rs. 4.7 Lakhs approximately.
- After deductions, petitioner claimed that he had been discriminated against, under section 10(10AA) of the Act.
- Petitioner has filed a writ petition before this Court, claiming that there has been a violation of his constitutional rights.
ISSUES RAISED:
- Whether the distinction of employees under section 10(10AA) of the Income Tax Act, 1961 is constitutional?
ARGUMENTS ADVANCED BY THE PETITIONER:
- The petitioner had served at SBI for 36 years, and should have been entitled to the entire sum of his leave encashment without any tax deductions.
- Section 10(10AA) of the Income Tax Act, was discriminatory in nature. It discriminated between Government employees and Employees of other establishments.
- The petitioner relied on the apex court’s ruling in the case of Union of India & Ors v. NS Rathnam & Sons to substantiate his argument.
- Petitioner would potentially lose a significant chunk of his leave encashment to Income Tax due to the discriminatory nature of the impugned provision.
- The constitutional validity of section 10(10AA) was challenged as Article 14 of the Constitution guarantees equality before law.
- The cap on the maximum amount exempted from tax under said provision, adversely impacted the petitioner’s financial entitlements.
ARGUMENTS ADVANCED BY THE RESPONDENT:
- The distinction made between government employees and employees of other establishments was a reasonable classification, not arbitrary but legitimate grounds.
- A bank employee, such as the petitioner himself, was of a distinct class than a State or Central Government employee and could not equate his employment with them.
- By notification dated 24.05.023, the limit of leave encashment was raised to Rs. 25,00,000/ w.e.f. 01.04. 2023 in relation to 'other' employees mentioned in clause 10(10AA) of ‘the Act’.
- In the case of Shri Kamal Kumar Kalia & Ors v. Union of India & Ors, the Delhi High Court held that the distinction between government employees and employees of various establishments was constitutionally valid.
- For matters of taxation and classification for tax purposes, the State has wide discretion.
- Public Sector Undertakings (PSUs) and Nationalized Banks can be considered as ‘State’ under Article 12 for the specific purpose of entertaining proceedings under Article 226 and for enforcing Fundamental Rights.
- Relying on the Supreme Court judgment of A.K. Bindal & Anr. v. Union of India, the respondents further argued that despite being wholly owned by the Central Government, a government company retains its independent identity, and employees of such companies are not classified as civil servants.
- Employees of such government companies cannot claim entitlements, protections, or any additional financial assistance from the government for matters such as revision of pay scales.
JUDGEMENT ANALYSIS:
- The High Court analyzed the submissions made by the parties and subsequently dismissed the petitioner’s argument of unjustified discrimination between government employees and others.
- It held that different sets of employees, forming different classes cannot be treated equally under Article 14 of the Constitution.
- Thus, the classification made between government employees and employees of other establishments was deemed reasonable.
- The Court held that it is a well-established principle that equality under Article 14 does not imply uniform treatment for all individual groups. Although distinctions or reasonable classifications may exist, it is not automatically violative of the constitutional principles.
- The Court observed that taxation laws cannot be exempt from the scope of Article 14 of the Constitution. It highlighted that any and every tax law must undergo scrutiny to ensure adherence to the Constitution.
- Citing the case of Union of India & Ors. (supra), it was ruled that the State’s latitude in taxation matters has already been recognized by the Supreme Court by upholding the State’s authority to impose taxes selectively on specific classes of people.
- However, relying on the ruling of Kamal Kumar Kalia & Ors (supra), the High Court held that employees of PSUs and Nationalized Banks cannot claim the same legal rights as government employees because they do not hold the same status or privileges.
- The High Court additionally took note of the ruling in S.K. Dutta, ITO v. Lawrence Singh Ingty wherein the Supreme Court ruled that the State has the authority to select the persons or objects it will tax, and a statute cannot be challenged simply because it taxes certain entities while exempting others.
- Ultimately, the High Court opined that as the classification has been subject to scrutiny several times and has been upheld each time, there is no need for reconsideration.
- The Court acknowledged that the limit for leave encashment had been increased to Rs. 25 Lakhs, effective from April 2023. However, since the revision came after the petitioner’s retirement, he does not benefit from it.
CONCLUSION
The High Court dismissed the Writ petition opining that the classification made in section 10(10AA) of the Act had withstood the judicial scrutiny and a reconsideration was not required. The Court further rejected the Petitioner’s plea of parity with the government employees, and therefore the tax deductions made could not be interfered with. The High Court’s stance reinforces the legality of distinct treatment for government employees concerning taxation matters.
